Crypto has become an attractive market for traders in recent years. It offers high returns, plus it has a decentralised financial system, moving away from more traditional markets.
However, the same features that make crypto exciting also make it risky. This article outlines key risks and practical strategies to help UK investors navigate this volatile yet rewarding space.
Volatility and Market Fluctuations
We might be seeing Bitcoin soar in value right now, but the lows can appear at any time. Cryptocurrencies regularly fluctuate in value, often moving in unexpected directions. Their extreme volatility means prices can swing dramatically within hours, leading to substantial gains or significant losses.
To safeguard investments, consider diversifying your portfolio across different cryptocurrencies. While Bitcoin tends to lead the charge, altcoins like Ethereum have seen similar success, so it’s worth looking to these other digital currencies to spread your investments.
Similarly, other asset classes can be a useful direction to diversify. This spreads exposure and reduces the impact of individual asset price swings. Additionally, set realistic risk levels for trades and introduce stop-loss orders to limit potential losses.
Regulatory risks
The cryptocurrency market is rapidly being regulated. These changes in legislation can impact crypto values as traders move cautiously.
Investors must stay informed about regulatory updates, both locally and globally. Tools like Compliance Risk Assessment Models (C-RAM) and smart contracts can help assess and mitigate regulatory risks. Using tech-driven analysis tools also provides insights into potential legal and compliance challenges, allowing investors to make informed decisions.
Security threats
As they are digital assets, cryptocurrencies are susceptible to security threats such as hacking, phishing, and fraud. These threats can result in the loss of funds or personal information, as demonstrated by high-profile exchange hacks over the years.
Prioritise security measures. Use hardware wallets, which store private keys offline, reducing the likelihood of cyberattacks. Enable multi-factor authentication for additional protection and use strong, unique passwords.
Avoid engaging with suspicious links or offers and verify the legitimacy of trading platforms when trading crypto too. There are excellent platforms available that will ensure your funds are secure.
Liquidity risks
Popular cryptocurrencies like Bitcoin and Ethereum tend to have high liquidity, but smaller or less-known tokens may be a liquidity challenge.
If you’re investing in a smaller cryptocurrency, be careful when dealing with low-cap digital coins, especially during market downturns when exiting a position could amplify losses. To manage liquidity risks, consider breaking up large trades into smaller, staggered transactions to minimise their market impact. This approach allows for a more controlled exit or entry into the market.
Take the time to balance the risks before you go ahead with a trade. While this is standard practice when trading any market, it’s especially important when trying your hand at crypto trading.
